LLC to Scorp. When to start paying wages?

Technical topics regarding tax preparation.
#1
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Client will file a Form 2553 to make the election for his LLC to be taxed as a Scorp. He understand he will have to pay reasonable wages to himself.

My question is when he should start paying himself the wages?

Let's say he will file Form 2553 on 9-1-2022. And the election date is 10-1-2022.

Now let's assume that he still has not received a response from the IRS by 10-1-2022. Shall he start paying him a wage as of 10-1-2022 even if he has not heard back from the IRS yet?
 

#2
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Yes. I would assume that the IRS will accept the election, unless you have some weird reason why they wouldn't.
 

#3
JR1  
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Agreed. You can presume it's approved.

Can you dodge some salary the first year, esp. when you're in the latter months? Maybe....I'd be shocked if it got picked up or anyone cared, esp. if you've got plenty of SE income the rest of the year....
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#4
MilesR  
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One thing I seem to remember from CE somewhere is if it's a timely election then 2553 is okay to file by itself. If it's a late election, an LLC is supposed to also file 8823 along with 2553.

If this is a brand new LLC then it should be within the 2.5 month period for a timely election and only 2553 is required.
 

#5
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It's taking the IRS 6 months minimum to issue an acceptance letter. Pre-COVID it was 90 days max. He should start paying reasonable comp effective 10/01. I've never heard of an S election being rejected that wasn't prepared by a competent advisor.

Prep it, review it, scan it to file, send it certified, and consider it done.

JR1 wrote:Can you dodge some salary the first year, esp. when you're in the latter months? Maybe....I'd be shocked if it got picked up or anyone cared, esp. if you've got plenty of SE income the rest of the year....


Statute of limitations never closes on returns that are not filed. Granted, the IRS may not pursue if it's peanuts in their eyes, but I heard in one CPE that the IRS has pursued unpaid FICA from as much as 30 years prior (unfiled employment tax returns). So, there's always a risk.

MilesR wrote: If it's a late election, an LLC is supposed to also file 8823 along with 2553.


I'd be interested in seeing that if you don't mind digging it up.
 

#6
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MilesR wrote:One thing I seem to remember from CE somewhere is if it's a timely election then 2553 is okay to file by itself. If it's a late election, an LLC is supposed to also file 8823 along with 2553.

If this is a brand new LLC then it should be within the 2.5 month period for a timely election and only 2553 is required.


Can you clarify what a 'late election' is?

The LLC has been in existence for three years since 2019. The owner decides to make the election for the LLC to be taxed as a S-corp starting 10-1-2022. So he will file Form 2553 in September 2022.

So is this a 'late election' in his case?
 

#7
sjrcpa  
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No it is not late.
 

#8
MilesR  
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BestQuestion wrote:
MilesR wrote:One thing I seem to remember from CE somewhere is if it's a timely election then 2553 is okay to file by itself. If it's a late election, an LLC is supposed to also file 8823 along with 2553.

If this is a brand new LLC then it should be within the 2.5 month period for a timely election and only 2553 is required.


Can you clarify what a 'late election' is?

The LLC has been in existence for three years since 2019. The owner decides to make the election for the LLC to be taxed as a S-corp starting 10-1-2022. So he will file Form 2553 in September 2022.

So is this a 'late election' in his case?


I pulled out that old book [2013 PPC 1120S Deskbook (Thomson Reuters)] and reread some of it. I think I mixed up some of the rules. For a C corp, a late election is if the election is made more than 2 months and 15 days after the beginning of the tax year that is to have S status.

But rereading it, it says an eligible LLC can elect simultaneously to be treated as a corporation and elect S status for any time during the year and is not stuck with a calendar year. So in this case, the LLC is electing to become a corporation as of 10/01/2022 and additionally immediately elects S status on the same date. So this would not be late.

I think that part I read a while ago that stuck in my head was this paragraph:
"The entity normally files the election to be taxed as a corporation on form 8832 (entity classification election) in accordance with Reg. 301.7701-3(c). However, if an LLC that is eligible to elect S status timely files an S election (Form 2553), the entity is considered to have made the election to be taxed as a corporation [Reg. 301.7701-3(c)(1)(v)(C)]. This means that the Form 8832 does not have to be filed if the entity timely and properly elects S status. "

So now I guess what it meant was if he were, for instance, electing S status to be active for Jan 1, 2022, this would be late and would require 8832.
 


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